Over the years, we have spent thousands of hours talking with our traders and answering their emails. We have a huge collection of really great information that only benefited the specific traders who we were interacting with. So, we decided to start sharing all of these gems of knowledge with everyone.

Thursday, October 29, 2015

The markets closed flat on today's session after putting in a decent move yesterday. With yesterday's move, all three majors are comfortably back into their summer ranges. This last bullish surge was fueled by some good earnings results and from an FOMC announcement, in which no action was taken as the Fed will continue to monitor the economy.

We have experienced a very direct move back above the 200-day moving averages (MA's) in these markets. We should expect this bullish move to slow down over the next week or so, as we enter deeper into our old range. Earnings results should create some directional opportunity moving forward. This could be a nice thing to have if we indeed find ourselves back in a market range, so let's keep an eye out for relative strength and weakness.

Wednesday, October 28, 2015

From Our September 2015 E-mail Archives: Today, our Head of Trader Development, Joe, answers a question from one of Maverick's traders about what to do when getting assigned in a vertical spread.*

-----Original Message-----

From: James L.Subject: Assignment

Hey Joe,

I was wondering if you could help me understand what I would do in a situation where I get assigned. I've been demo and live trading for a while, but haven't been assigned yet. I want to be prepared and not go into "panic mode" when it does eventually happen.

I'm guessing the action would depend on what kind of position I would be in. For starters, let's say that I'm in a vertical that's well beyond max gain in the week of expiration and I get assigned stock.

Would you hold the position for max gain through the expiration or close out the stock followed by the long leg?

Thanks!

James

-----Reply Message-----

Hey James,

With a vertical spread, it is fairly simple.

In the scenario that you described, an In-the-Money (ITM) vertical spread, you would simply allow the whole thing to "same day substitute." At expiration, both options would be worth money and both options will be replaced with stock.

Since you are long one side of the vertical spread and short the other, shares will be assigned long and short. Following the guidelines of a vertical spread, you should have had the same amount of contracts long and short. So, upon assignment, your newly acquired long and short shares will cancel each other out, leaving you the difference +/- your original credit or debit.

The idea is not to panic, which will certainly take some getting used to.

If you would like some examples of similar situations, I run an options expiration class each month on the third Thursday (two days before the monthly expiration cycle ends). We cover Maverick's positions, along with any trader positions they would like discussed via the questions box.

EDITOR’S NOTE: Remember, when you are long the original vertical spread (i.e., a debit spread), then you want the spread to go to full value (as above). If, instead, you are originally short the vertical spread (i.e., a credit spread), then you actually want the spread to expire worthless.

Tuesday, October 27, 2015

All three majors look to be hesitating after pushing through their 200-day moving averages last week. We have seen some earnings reports add fuel to this bullish move, as we now find ourselves back into this past summer’s range.

Earnings should continue to drive market sentiment, as bullish sentiment seems to be the most prevalent over the last few days. We should continue to follow earnings results, along with new tests of support and/or resistance, as we move back into the year’s previous range.

We are still seeing bullish and bearish opportunity, although we should not be too aggressive in either direction. Make sure to add a sideways element to your strategies if available. Now that we are back into previous ranges, look to earnings results for any change in relative strength and weakness moving forward. This could take a few days, so be sure to follow your sector charts.

Friday, October 23, 2015

From Our October 2015 E-mail Archives: One of our traders asked how much weight to give to other elements of the markets. Our Head Trader, Robb, replied with his thoughts based on nearly two decades of trading experience.*

-----Original Message-----

From: Mark G.Subject: Quick Question If You Have A Moment

Hi Robb,

Mark here – one of you junior traders. One of the struggles I've had this year deals with correlating data (not sure if that's the right term).

For example, everything on the chart for the S&P 500 Index ETF (SPY) right now is telling me to go long. My weekly and daily charts have broken key levels, plus my weekly and daily moving averages that I look at have either broken or are about to break key levels. If this were just an ordinary stock called "XYZ", then I'd be going long.

What stops me is not the chart itself, but the fact that it's an index and shouldn't other elements of the market (like bonds, gold, etc.) be behaving in a certain way?

I needed to balance out my portfolio with some longs, but i didn't pull the trigger on some setups because I saw things like the bond markets going higher as we were approaching new highs, which signaled to me stocks going down – which didn't happen.

How much credence should I (or rather, do you) put in other elements of the market when determining your outlook or your decision to enter long or short positions?

Mark

-----Reply Message-----

Hi Mark,

Thanks for the email. I think your question is a great one and the answer is not a short one.

When you go out and perform your research, you will inevitably find conflicting data, which leads to confusion and uncertainty. The first thing you need to understand is that THERE IS NEVER CERTAINTY!

One of the biggest problems that I have seen in all of my years in this business (and working with tons of traders) is that many traders who are left-brainers (i.e., analytical) often try to fit the market into boxes and categories where the outcome is certain.

For example, in engineers' minds, if the process is correct and everything is hooked together correctly, then the desired result will ALWAYS happen. When it doesn't work, then they believe that there is something wrong or missing in the process. They also believe that once they figure that out, then they will achieve the desired results.

Now, this is how most things in life work....except trading. Ha! Just kidding.

To have the correct outlook, you need to think more like a poker player than an engineer; that is, you need to understand that it's all about odds and there is never certainty. As a poker player, you aren't consumed about winning every hand. Rather, you are concerned about only playing hands that have high win/loss ratios, fully knowing that even with an AA (ace, ace) in your hand, you will still lose 71% of the time if playing with 6 people. Before taking a bet, successful poker players wait until they get the right hand at the right position on the table against the right players.

As traders, we need to think the same way. We are not trying to predict what will happen in the future. That's a fool's game and never works. We need to think like the poker player and think about odds and risk/reward. The first thing that we need to do is build a system (trading plan) that outlines the exact things/correlations that have to happen before you take action. The more inputs that you put into your plan, the less setups that will trigger since there becomes conflicting data. Whenever you have conflicting data, it doesn't match the setup criteria and the trade can't be taken. At Maverick Trading, we like a more simple trading plan/system that is accurate and timely and much easier to use/navigate.

To answer your question, I think you are throwing in way too many inputs into what you are looking for in a trade setup. If you go out to the markets and research and score everything, then you will almost always be confused. In the rare time everything does match up, then it's highly likely that your stock/market is in the last gasp of a trend and there is a major trend reversal in store. That's what I've found in my life in the markets. Once everything gives you the green light you were waiting for, the trend is likely over.

I recommend that you first go back to your trading plan or implement new inputs into your analysis and ignore everything else. In your example, you mentioned the SPY on the daily chart is bullish, but the weekly and monthly charts look kind of bearish. Your time frame will determine which inputs you want to use.

For example, my trades usually last 2-3 weeks, so I am not too concerned with weekly or monthly charts. All my analysis needs to be done on the time frame that matches my desired trade length. If I have a 2-week trade, then I don't care what happens to it next month. All that matters is that 2-week time frame.

Secondly, you need to choose which other markets you will use as inputs and ignore the rest. I personally think that both gold and oil don't correlate well with equity prices, but I do think that bond prices have correlation worth watching. However, there will be periods of time where the gold and oil markets will have much greater correlations on equity prices than the bonds do. Now, if I am using bonds and you are using gold, then sometimes your inputs will be more accurate than mine. However, over a few years there really isn't much difference as long as we stay consistent.

To sum it all up, figure out what your inputs are going to be for your checklist/setups and ignore everything else. Then, follow them religiously. Understanding your inputs will work better in some markets and not so much in other markets. I know we would all love to perfectly pick and choose which indicators will work in the present market conditions, but that is pure fantasy. Consistency is the key to this business and is FAR more important than the gold market's correlation on equities.

Thursday, October 22, 2015

The markets made a big push higher today, driven by earnings results and comments from the European Central Bank (ECB). In a statement today, ECB President Mario Draghi said the ECB would be willing to deliver more economic stimulus measures. This had a very positive impact on the U.S. markets, as fear of overseas weakness has hindered these markets for quite some time. All three majors posted gains north of 1.5% on the session.

We now find ourselves breaking back into previous support levels: 17,400 on the INDU and 2,050 on the S&P. A stronger global economy will play its part in adding bullish fuel; however, earnings will be the main factor to any continuation of bullish movement. We need to see if the markets can move deeper into their old range set back in the spring/summer of this year.

So far, earnings have been more positive to this point – although not all positive reports have been met with buying. AMZN, GOOG, MSFT and T are all moving higher after hours with favorable results.

Mid-Week Outlook:

Tuesday, October 20, 2015

The markets posted two flat days this week as we are now approaching the next level of resistance. This last bullish surge has pushed the markets out of their lower range. It has been a pretty steady bull move off of the bottom set a few weeks ago, including a small two-day retest of resistance once it was broken. The markets are now testing levels not seen since July and, if broken, will put us back into the summer range area.

With continued bullish strength, the markets could recover the majority of the correction that we witnessed in late-August. This would move the markets back into their higher range; however, without stronger economic numbers and strong earnings results, we shouldn’t expect to move higher from there. Without any major unexpected events, we should expect the markets to continue churning forward at a pretty dull pace (at least through earnings season).

Thursday, October 15, 2015

The markets made a decisive move higher from resistance levels. We wanted to see if these markets could gather enough strength to push higher – and today’s action looks to have done just that.

Our next resistance point will be the area where the markets fell from in late August. This looks to be a strong move by the bulls; however, we still have some strong resistance ahead. Look to add some bullish diagonal trades, if possible. Stick with the adjustable shorter-term weekly expiration, if available.

Earnings season is off and running. Although we haven’t seen many results just yet, we do expect results to have an impact on the markets, even if it is only for a day or two. Our main focus should be on the overall market sentiment. Let’s see if today’s move can continue into a trend and how it holds up to earnings results.

Make sure to address your October monthly positions since they will be expiring tomorrow.

Wednesday, October 14, 2015

From Our August 2015 E-mail Archives: One of our traders sent a multi-question email about his recent trading. Our Head Trader, Robb, answered with a 1,500-word reply. No one can ever say that Robb is a man of few words! So, we broke up the original email into four parts. Today, we present the reply to Question #4 of 4.*

-----Original Message-----

From: Thomas G.Subject: Trades

Robb,

Hope all finds you well. I have a few questions from my recent trading.

Diagonals – In my Trading Plan, it says that if I'm down on the diagonal option spread at expiration, then I either take the trade off the table or use lower lows to exit the trade. If I bought September and sold August and I'm down, then is there a way to sell against it again since I'm down overall in the trade?

Verticals – In my Trading Plan, it says keep vertical option spreads until expiration to increase my R/R (Reward/Risk). So, when do you scalp these or take them early, if ever? I placed a trade on CAT this week: a 77.50 / 75 vertical. I'm up a little on the trade and I do believe it will get to 75. However, I'm not as confident in CAT staying below 75 until August expiration with it being this extended to the downside. Maybe I just picked the wrong strategy or time frame; however, if it were to bounce, then I can't just see holding it to a max loss...but I also don't want to cut my winners.

On lower lows, is it a closing low or just a lower low during the day?

When I trade my account, I often have over 20% of my portfolio at risk. If I had less than 20% and I was trading at 2% per position, then I would have 6-8 trades on at a time. Are 6-8 trades of $3k-$4K invested at a time enough trades at a time? I'm over trading currently (I'm trying to work on that!), but I don't want to under trade either. Editor's Note: We will show the answer to this final question this week.

Sincerely,

Tom

-----Reply Message-----

Hi Tom,

Thanks for your questions. I’ll try to answer them as best as possible:Editor's Note: Answer to Question #4 below. This completes the 4-part series.

“How many positions and portfolio at risk?” I wish this was a question that had a black and white answer; however, there are just too many variables. We don’t have a rule on how many positions a trader can take since the number of positions isn’t as relevant as the amount at risk is.

The ideal number of positions really comes down to you as a trader. That is, you have to decide for yourself how many positions you can carry at once and manage all of them well based on your trading plan. Personally, I top out at around 20 positions. Any more than that and I find myself making mistakes or forgetting to make exits/adjustments. With that said, we have traders who can effectively manage more than 20 positions.

On the other end, we do think that there is such a thing as not enough positions. At Maverick, we look at trading as an overall numbers game and not about the individual trades you may have on at any one time.

If you are only trading 2 or 3 positions, then you are much more likely to be overly focused and concerned with your trades. Traders tend to make these trades too big in relation to position sizing rules. With so few trades, you have the risk of getting an unlucky piece of news that comes out and blows up a trade or two. If you only had 2 trades (especially with too big of position sizes/risk), it will lead to a big monthly drawdown. This is when traders make mistakes and don’t take small losses; rather, they tend to dig a deeper hole.

In contrast, if you have 15 small trades, then you are putting yourself in a position where your monthly returns will be determined not by a stroke of good or bad luck, but by correctly charting and managing the basket of trades. Even if 1 or 2 of the 15 trades are hit by bad news, you should have plenty of others that work your way – especially if you have a fairly balanced number of bullish, sideways and bearish trades.

In our opinion, 6-8 trades per month are about the minimum. You will have to test yourself to understand what your personal maximum number of trades is. Just cut down the average position size to carry more trades and you should see smoother results (i.e., less account volatility).

As far as your question of risk goes, it’s not about how much capital you have invested, but how much of that capital is at risk. One of the reasons that we believe in always carrying both bullish and bearish positions is to allow us to use more of our account sizes in trades without carrying huge risk in case the market spikes/plunges.

One of the best trading tools that our traders have access to is the Risk Management tool in their Interactive Brokers account. It basically takes a trader’s basket of trades (bulls, bears & sideways) and draws a risk graph of what would likely happen if the markets spike +5% or drop -5%. This allows our traders to see how much of their account is at risk from an unexpected move in the markets. It gives them a worst case scenario where – if everything went wrong – they could see the impact on their account. Then, a trader can make an educated decision to, for instance, never carry more than a 30% worst case scenario.

Tuesday, October 13, 2015

This bullish move looks to be running out of steam, as we closed slightly lower on today’s session. We have seen some very small-ranged days as of late, which is an indication of slowing momentum. The S&P and INDU are above resistance levels, as the Nasdaq continues to lag behind.

We could see our first test of support over the next few days and are interested to see if it can indeed hold. We haven’t seen any great opportunities in directional trading this week; however, a market pullback should create some opportunity.

Earnings season should stir things up a bit moving forward. We will start seeing results pick up over the next couple weeks. There could be some good earnings plays out there, so make sure to research a few different ideas before jumping into an earnings play. You must have a plan for exit, whether or not you get the desired move. A ratio spread can carry a large max risk if it is not adjusted immediately after the event (check your risk graphs!).

Not much has changed since last week. Nothing really huge in the headlines.

Thursday, October 8, 2015

The INDU and the S&P pushed through resistance levels, with the Nasdaq not too far behind. The markets started off slow, but picked up momentum to the bull side after the FOMC minutes. The Fed’s stance hadn’t changed much from its last meeting, with no rate hike planned for September. The Fed is still focusing on continued weakness overseas and keeping an eye on economic stability at home.

After today’s FOMC minutes, all three majors turned higher since we will probably not see a rate hike in September. We will see if today’s move has any follow through tomorrow to confirm a move out of the markets upper range. We could see some bullish trades trigger here (which is great), but don’t over-extend yourself too far in one direction just yet. Today was only the first test above resistance and we will indeed need to see a little more before changing to a more bullish outlook.

Mid-Week Outlook:

Tuesday, October 6, 2015

The markets took a little break today, as they have put in a decent up move over the last few days. We have seen some bullishness in the markets since Wednesday of last week. Today, however, we look to be slowing as we are now approaching resistance.

All three majors are still within their respective channels, but now testing resistance. We should expect some hesitation at these current levels tomorrow, whether or not the markets retest or break out. Either way, we will need at least another day to confirm a breakout or bear rally.

Not much has changed in the markets as we are now at our upper channel resistance levels. As always, stay patient and balanced.

Thursday, October 1, 2015

The bulls edged out the bears today, as we regained all of the day's losses to close flat on the session. Yesterday's move confirmed a lower pivot point in the markets. However, with amount of bearishness we have been seeing lately, we were not quite sure how far up this bounce would go.

Today's move does indicate bullish presence and could suggest that we make another bullish move tomorrow (Friday). Hammer candles are usually a bullish sign, but we did see a very similar pattern last Thursday which was overshadowed by a shooting star the next day. Try and keep this in mind as we close out the week tomorrow. Let's take advantage of either direction.

There are many opportunities out there, so take them as they confirm. We are still within the trading ranges of these markets and can benefit from a 3-5 day move in either direction. Stay mindful of support and resistance levels as they are tested.